The United Kingdom's inflation rate is anticipated to have declined in April, as a reduction in household energy costs counterbalanced a spike in fuel prices. However, experts caution that turbulence lies ahead as the impact of the Iran energy price shock begins to affect the cost of living.
Economists project that the Consumer Prices Index (CPI) inflation rate slowed to 3% in April, down from 3.3% in March. This indicates that while prices continued to rise year-on-year, the pace of increase moderated compared to the previous month.
Energy price cap reduction
A primary factor behind the expected slowdown is Ofgem's reduction of the energy price cap by 7% from the start of April, equating to a saving of £10 per month for the average dual-fuel household. This decrease was largely driven by government measures, including shifting 75% of the cost of the UK's renewables obligation from household bills to general taxation and the elimination of the energy company obligation scheme.
Fuel price surge
Nevertheless, the overall energy landscape in April was mixed, with motorists facing a sharp increase in fuel prices following the onset of the US-Israel conflict with Iran. Sanjay Raja, chief UK economist at Deutsche Bank, anticipates that pump prices rose by approximately 15% in April compared to March.
"Looking ahead, we expect price momentum to pick back up as the Iran shock catches up with the inflation data," Mr Raja noted in a research report. "Indeed, dual fuel bills won't rise until the summer."
Future outlook
Household energy bills are forecast to increase from July when the regulator announces its next price cap. Analysts at Cornwall Insight predict a potential rise of 12%, or £196 annually. Victoria Scholar, head of investment at Interactive Investor, commented that April's lower energy price cap "will go some way towards helping offset higher petrol, airline and other prices impacted by the elevated global oil price backdrop," with Brent crude averaging around $120 per barrel during the month.
"When the Ofgem energy price cap resets in July, UK households will be faced with a sharp increase in energy bills," she cautioned. "Were it not for the Iran war, it would be about this time that the UK inflation rate was finally expected to fall back to the Bank of England's 2% target. Instead, interest rate and inflation expectations have drastically rerated higher."
The Bank of England maintained interest rates last month and anticipates that inflation could rise under several scenarios related to the energy shock. Experts stress that the economic outlook remains uncertain, hinging on the duration of the Middle East conflict and the trajectory of oil and gas prices.
